Dear Editor,
Last November Vice-President Bharrat Jagdeo announced prematurely that China State Construction and Engineering Company (CSCEC) was selected to construct the new bridge across the Demerara River. More recently he disclosed belatedly that talks with said company have actually collapsed. The VP reported that talks with CSCEC were terminated because its financing costs are too high and indicated that these costs would have to come down. Answering the opposition in the National Assembly, the Minister of Public Works, amongst other things, hinted that the contractors’ terms of interest was an issue, and that the bidder next in line would soon provide “a Terms of Interest Sheet”.
Hence the decision makers on this project evidently believe that mis-applied or undercover interest rates are responsible for high financing costs (the VP) or country-strangulating repayment terms (the Minister) in the post-tender premium presented by CSCEC. However I respectfully suggest that the government is looking in the wrong direction for the cause of this development.
My view is that any bidder approached for negotiations at this stage of the project is in the firm grip of the Bid Winner’s Dilemma which, with its psychological dimensions, is a characteristic of markets where prices are set by the lowest sealed bid. I have previously constructed a Guyanese example of this phenomenon, and typical consequences observed locally. (See SN 8 September 2019 – the Bid-winner’s Dilemma). To summarise: a project bidder at the time of tender must address the risk of submitting a price that is too high to be considered further. If successful, however, focus must immediately shift to addressing the risk that the same price is too low to successfully complete the project, including addressing both explicit and perceived risks that the now-committed bidder is unwilling to bear. Note that the interest rate of a funding bank is not the cause of such re-assessment and may not be even included in the all-inclusive additional premium.
In this regard the government conditionalities laid out to bidders which include a “non-negotiable” two-year completion time linked to delay damages of $5 million per day, and the requirement to conduct sub-soil and related surveys within the overall design and construction period, are risks explicit for all to see. Prior to bidding the two-year period was questioned by bidders, but left in place by government, whilst the delay damages are obviously meant ‘to terrify’ any successful bidder into compliance. The mentioned surveys are mandatory before design and engineering of the bridge structure can be confidently completed. The successful bidder is unlikely to accept these conditions willingly.
On this basis it would be instructive to observe how the government will entice the ‘financing costs’ to “come down” after evidently contributing to such costs. In the meantime it is still open to the government to relax the conditionalities on this bridge project: adjust the already jeopardized start and possibly de-link completion time from the election cycle; and commission its own site investigations so that it is forewarned directly on relevant concerns. These steps would also provide welcomed respite for resolution of important public environmental concerns and settling of private land acquisition matters.
Regards,
Donald Rodney
